The Market is Very Expensive: Is It Time to Take a Step Back?
The stock market is blindingly, fiery hot right now. The S&P 500 is having the best YTD performance ever. I have been able to capitalize with high-risk investments, sending my portfolio up 50% YTD. As has to be the case when the price of your holdings has increased by 50% on average, each position has become incredibly expensive, overvalued. My average forward P/E is 70, excluding a hyper-aggressive ETF position and a position projected to have a negative P/E ratio for the coming years, so there is not just a ton of value in my portfolio. People are starting to get a little freaked out too. There is definitely an air of worry because everybody has made so much money so quickly, and firms like Goldman are projecting paltry numbers (3% annualized over the next decade), which is also freaking people out.
All of this raises a few questions. First, is this market truly overvalued? And second, if it is, what do I need to do to protect myself?
To answer the first question, yes, the market is wildly overvalued. Over $87 billion went into equities between November 1st and November 13th, forcing prices to surge, in what some people worry is a “melt-up,” when the market builds upwards and compounds not because of increases in value but because investors are herding themselves together in a group-thinking, confirmation-bias induced mass. The market is overvalued because a company like MicroStrategy, a company with a truly reprehensible and disgusting strategy is not bankrupt. A truly ludicrous amount of call options are being bought every day. Cryptocurrency, which tracks, despite what many crypto-bros think, the general market has raced higher and higher. Dogecoin has a $55 billion market cap, making it worth more than Ford.
Beyond looking at individual companies and crypto, you can simply look at the S&P 500 valuation. The S&P 500 is trading above a 24, higher than the already high 20 average over the past five years. The S&P is at a record high, jumping above $6,000 for the first time ever. The Mega-cap stocks like the Magnificent Seven exceed the already steep S&P valuation, except for Google.
These companies and the market are propped up on a few prongs: Lower interest rates, AI, increasing earnings, and America just being the best. Lower interest rates are already more than priced in. AI is unpredictable, and while I try to have a ton of exposure to any company with AI, AI alone does not justify the valuation of this market. Earnings are going up, but they clearly are not tracking price increases. Also, earnings are not increasing uniformly. Companies like Target are falling by the wayside. America is the best, espescially for the stock market, but past results do not guarantee future results, and Trump’s earnings might cripple the global economy.
I sound pretty bearish, right? In a way, I guess I am. If I am bearish, then I must be making protective moves in the market, right? No, I am not doing anything to protect myself from a downturn. If anything, I have been bolder in my investments recently.
You have to go back to basics in situations like these. Are you fine losing most or all of this money invested? If the answer is no, then you should go to the classics. You should just put money into treasuries and pick up 4.2%, invest in Berkshire, and find forward P/E ratios under 20. If the answer is yes, as it is with me, then you should pile into risk, but please do not be stupid. I feel like I say this in every article, but there is stupid and smart risk. You need to take smart risk. Buying MicroStrategy is stupid, gambling addiction risk. Buying a company like Ferrari at a steep, steep valuation is smart, worthwhile risk.
You have to take a long-term view. Do you think that in ten years the stock market will have increased or decreased in price? If you think it will have increased then you should try and organize your portfolio so it always does 1.5x whatever the market does, up or down. Honestly, if you want to just never touch your portfolio again and do what I am telling you to do, you just make TQQQ 100% of your portfolio. It allows you to get three times the NASDAQ 100, to return 3x the general market, which is perfect.
The market will continue to increase in the coming year, albeit at a slower pace, and then, at some point, the market’s legs will give out, much like me trying to run three days in a row. If you are following my strategy, the S&P 500 will be down like 15% or 20% over a six-month period, and you will be down like 30% or 40% over that same period. You should not lose your never. Remember that you should already have made so much money from this period we’re in right now, so you will probably still be up in the net, and the market will rebound.
Stay risky, but PLEASE, PLEASE be smart.
